The Impact of Financial Development on Economic Growth in Emerging Economies

The objective of this paper is to assess the impact of the financial system on economic growth for a sample of emerging economies during the period 2012–2023. Additionally, the study examines how the level of national development (represented by per capita income) influences the relationship between financial development and economic growth. Using the Pooled OLS, Fixed Effects Model (FEM), Random Effects Model (REM), and the Generalized Least Squares (GLS) method, this paper focuses on analyzing the impact of financial development on economic growth in emerging economies, aiming to identify which aspect of financial development best explains economic growth in these countries. The empirical results indicate a unidirectional relationship from financial development to economic growth, with this relationship being stronger in low-income countries within the region. Regression results using the Fixed Effects Model (FEM) show that financial development, represented by three factors—banking system development, the ratio of liquid liabilities to GDP, and stock market capitalization to GDP—positively correlates with economic growth in emerging economies, as measured by per capita GDP. Government spending and trade openness act as control factors that promote economic growth, whereas inflation negatively impacts growth. Based on these findings, this study provides several recommendations for financial market development to further stimulate the growth of emerging economies.